BACKGROUND: The lack of formal health insurance and inadequate social safety nets cause families in most low-income countries to finance health spending through out-of-pocket (OOP) payments, leaving poor families unable to insure their consumption during periods of major illnesses.

OBJECTIVE: To examine how well the Indian healthcare system protects households of differing living standards against the financial consequences of unanticipated health shocks.

DATA: The data are drawn from the 52nd round of National Sample Survey, a nationally representative socioeconomic and health survey conducted in 1995-1996. The sample comprises 24,379 (3.84%) households where a member was hospitalized during the 1-year reference period.

METHODS: We estimate, using ordinary least squares, the relationship between household consumption (proxy for ability to pay) and OOP payments for hospitalization. We also estimate the relationship between consumption and OOP share in consumption. RESULTS: Our results indicate that both utilization (payments) and the consequent financial burden (payment share) increases with increasing ability to pay (ATP). While this relationship is retained across the different subgroups (e.g., gender, social code, region, etc.), comparisons across groups indicate horizontal inequities including differences in both degrees of progressivity and the redistributive effect.

CONCLUSION: The finding that OOP payments do not decline with ATP could be an indication of: (1) the lack of insurance which implies that the better-off must pay from OOP to secure quality health care and (2) the absence of risk-pooling or prepayments mechanisms which poses financial impediments to the consumption of health care by the poor